A Deposit Account Control Agreement (DACA) is a legal agreement that gives a lender some control over a borrower’s bank account. DACAs are commonly used in secured lending when a company takes on debt – for example, a loan, line of credit, or issuance of bonds.
The DACA gives the lender rights to take control of the bank account if the borrower defaults on repaying the debt. This protects the lender by ensuring access to the borrower’s cash to repay the outstanding debt.
How Does a DACA Work?
A Deposit Account Control Agreement works as follows:
Parties to the DACA
There are three parties to a typical DACA:
- The Borrower – The company taking on debt in order to receive financing. This is typically the bank account holder.
- The Lender – The institution providing the debt financing, such as a bank or bond investors.
- The Depository Bank – The bank where the Borrower’s account is held.
Access Rights Under Normal Conditions
Under normal conditions, the Borrower retains full control over their bank account. They can make deposits and withdrawals as needed to run their business operations.
Meanwhile, the Lender has no access or control privileges for the account. The DACA simply establishes these rights for the Lender, which can be activated later if needed.
Activation Upon Default
If the Borrower defaults on repaying the loan per the debt agreement, this triggers the DACA.
Default may occur if:
- The Borrower misses one or more debt payments
- Files for bankruptcy
- Breaches another condition of the lending contracts
Once activated, the DACA gives the Lender specified privileges over the bank account. Common rights include:
- Block Borrower Access – The Lender can block the account, preventing any further withdrawals or deposits by the Borrower
- Take Control – The Lender gets authority to take over account withdrawals and issue instructions for cash transfers
- Sweep Funds – The Lender can instantly sweep funds from the Borrower’s account to repay outstanding debt obligations
This allows the Lender to seize cash the Borrower has on hand and take over account controls to recoup their loan.
Why Do Lenders Require a DACA?
Lenders want the assurance that they can access a Borrower’s cash to get repaid in a default scenario. A DACA serves several risk management purposes:
Recourse for Repayment
The DACA gives Lenders the legal means to directly access a Borrower’s bank balances. This provides recourse to get repaid from available cash if the Borrower isn’t making payments.
Without a DACA, the Lender would have to pursue public bankruptcy or foreclosure proceedings and fight for access to cash – likely recovering less.
Priority Over Other Creditors
By establishing DACA privileges upfront, the Lender gets priority access over any other creditors to cash in the blocked bank account.
Security for Repayment
While other loan collateral like property or equipment can be complex to liquidate, cash is simple for a Lender to value and control. The DACA establishes a Lender’s security rights over balances in the account.
Cuts Off Access to Cash
Exercising rights to freeze the bank account also prevents a distressed Borrower from pulling out any remaining cash. This limits their ability to funnel money to owners, investors, or other accounts where the Lender couldn’t access it.
Requiring a DACA helps the Lender manage risks by contractually assuring access to repayment sources. This makes the Lender more willing to provide financing at lower interest rates and flexible terms.
When is a DACA Used?
Deposit account control agreements are commonly used in secured loan transactions, including:
- Asset-Based Loans – Revolving credit facilities backed by a company’s working capital assets, like accounts receivable and inventory. The lender requires control over operating cash accounts.
- Term Loans – Fixed-payment schedules loans issued for a specific purpose, like acquiring a business. The term loan may require restricting how the company uses or distributes operating cash flow.
- Bonds / Private Placements – Issuing corporate bonds creates fixed obligations to bond investors, with operating cash accounts and other assets used as security.
DACAs also establish control rights in some private equity investments:
- Venture Debt – Loans to fund high-growth startups, with rights over key operating accounts.
- Mezzanine Capital – Late-stage private capital which may require restricting distributions of profits or excess cash held by the company.
Essentially any large scale corporate financing where a company pledges its assets may utilize a DACA as part of the legal contracts. The DACA allows funders to mitigate repayment risks contractually rather than rely solely on the borrower’s creditworthiness.
What Rights Does the DACA Give the Lender?
The Deposit Account Control Agreement gives the lending institution extensive rights to control the borrower’s cash, bank account activity, and account settings once activated, including ability to:
- Freeze the Account – Block all withdrawals/deposits by the account holder (borrower)
- Take Ownership – Assume full account control and ownership privileges from the borrower
- Transfer Funds – Withdraw, transfer or wire cash from the account to the lender
- Change Signatories – Update authorized signatures and approvers on the account
- Adjust Settings – Alter account permissions, statements, online banking access
- Lock Digital Access – Block account holder’s online login or account dashboard
- Ongoing Control – Maintain full authority until debt is repaid in full
These powerful account controls allow the lender to instantly lock down cash accounts and funnel balances to repay owed debt during a default.
What Happens if the Borrower Defaults?
If the borrower fails to make payments or breaches other debt conditions, default terms are triggered allowing the lender to activate DACA account controls. The next steps would include:
1. Lender Provides Notification
The lender sends formal notification to the depository bank and borrower that specific default event(s) have occurred authorizing DACA activation.
2. Bank Freezes Named Accounts
Upon receiving notice, the bank immediately blocks all account activity from the borrower across accounts listed in the DACA. This prevents withdrawal of any remaining cash.
3. Lender Assumes Account Control
With accounts frozen, the lender takes over full account ownership privileges per DACA terms. They change online banking passwords, account signatures, and transfer balances.
4. Cash Swept to Lender
Finally, the lender will transfer or wire remaining cash in the frozen accounts to the lender’s own accounts. This allows available cash to repay portions of the owed debt.
5. Debt Collection Continues
Even after sweeping available cash, some debt principal, interest, and penalties may still remain unpaid. The lender continues the broader debt collection process, including seizing and liquidating other pledged collateral assets.
So in summary – default triggers allow lenders to lock borrower accounts, take control, and transfer balances.
What Happens After the Default is Cured?
Ideally once a borrower defaults, cash from DACA accounts and liquidated collateral would fully repay balances owed to the lender. However, sometimes additional recovery takes place over longer periods.
If the borrower is able to resume making payments or fully settle debt later, then account control would be transitioned back to them. Steps could include:
- Curing Default – If the borrower resumes payments or pays back missing amounts within grace periods, this may cure the default – reversing DACA activation.
- Partial Control Returned – As Debt is gradually repaid, the lender may return some account privileges to the borrower, while retaining some DACA controls until fully repaid.
- Full Control Returned – Once all principal, interest and penalties have been repaid on formerly defaulted debt, the lender releases the DACA security interest entirely. The borrower regains full control of the deposit accounts.
So DACA account control is intended to secure repayment, not permanently seize assets. If former defaults are cured and lenders made whole, account control reverts to borrowers after debts are paid.
What Are Costs Related to Establishing a DACA?
Beyond the general fees for obtaining financing like loans, there are some specific costs borrowers and lenders incur to set up a Deposit Account Control Agreement:
Legal Costs
Professional legal fees to carefully negotiate and draft the DACA terms can range from $5,000 – $15,000+ depending on complexity. Counsel is required for both borrower and lender.
Ongoing legal support may also be needed over the financing term if the DACA is actually activated and enforced due to borrower defaults.
Bank Fees
In addition to their own legal fees, depository banks sometimes charge modest one-time setup or renewal fees to participate in implementing DACAs. These account control agreement fees typically range from a few hundred to a few thousand dollars.
There can also be minor administrative charges to banks for changing account authorities, freezing access, or transferring funds when DACA default enforcement occurs. Activity, wire transfer, and other transactional fees may apply.
Conclusion: Key Takeaways on DACAs
In closing, main points to understand about Deposit Account Control Agreements in secured lending arrangements include:
- DACAs contractually establish a lender’s rights to assume control of specified borrower bank accounts upon events of default on repayment.
- Takeover powers allow lenders to block account access, change settings, transfer or “sweep” balances to repay debt.
- Rights are negotiated and codified upfront in signed agreements between borrower, lender and depository bank where accounts are held.
- DACAs provide reassurance to lenders that borrower cash will be accessible to cure non-payments based on triggers for taking control.
- Accounts no longer fully belong to borrowers once DACA protections are in place for lenders, though day-to-day usage continues until default.
- DACAs have become an essential tool for lenders to secure corporate financing while managing portfolio risks.
So in summary – Deposit Account Control Agreements, while technical, play a critical role in enabling borrowers to access credit while protecting the institutions lending them money. Understanding DACAs is key for both lenders structuring facilities and companies taking on debt obligations.